David Jones Forecasts Smallest Profit Since 2006 on Costs

David Jones Ltd. (DJS), Australia’s
second-largest department store chain, forecast its smallest
profit in six years as rising costs, falling sales, overseas
competition, and the strong Australian dollar crimp earnings.

David Jones slid as much as 13 percent, the most in eight
months, in Sydney trading after saying net income will fall
between 35 percent and 40 percent in the year through July. The
forecast implies earnings between A$101 million ($106 million)
and A$109 million, as much as 28 percent below the average of 11
analyst estimates compiled by Bloomberg.

Stalling consumer spending is curbing demand for designer
fashions as shoppers take advantage of a higher Australian
dollar to buy from overseas websites, while earnings from David
Jones’ credit card unit are set to halve. Chief Executive
Officer Paul Zahra plans to increase the number of online
product lines 10-fold, to give a bigger range than Macy’s Inc.,
in an attempt to win back customers.

“This is something they should have addressed a long time
ago,” Chris Weston, an institutional trader with IG Markets in
Melbourne, said by phone. “David Jones is a good brand but you
can get everything so much cheaper online now.”

The Sydney-based retailer’s shares fell by 11 percent,
Australian cents, the biggest decline since July 14, to close at
A$2.43. David Jones was halted from trading in the previous two
days.

Rising Consumer Imports

While Australia’s economy grew faster than the U.S. and
euro zone last year thanks to a commodity-led boom, the
household sector has struggled as costs rise, while an increase
in the nation’s currency to record levels exposed retailers to
cheaper overseas competition.

The country’s consumer imports rose to their highest level
on record in January, contributing to the first trade deficit in
11 months. Retail sector employment fell in February to the
lowest level in 21 months, with 35,400 jobs having been lost in
the sector over the past year.

“There are patchwork pressures in our economy,” Treasurer
Wayne Swan told reporters at a press conference yesterday. “Not
every business or every worker is in the fast lane of the mining
boom.”

Offshore Internet stores including Amazon.com Inc. (AMZN) and Asos
Plc. are providing free delivery to Australia to take advantage
of the nation’s currency, while overseas department stores such
as Saks Inc. now ship to the country.

More Than Macy’s

Christian Dior’s J’adore Eau de Parfum sells for A$180 in
100 milliliter bottles on David Jones’ online store, 75 percent
more than the A$103.07 price of the same sized bottle at the
Australian version of Nordstrom Inc.’s online store.

“These are the toughest retail conditions that I’ve seen
in my career and I’ve been in retailing 30 years,” Chief
Executive Officer Paul Zahra told a media conference after
announcing results.

David Jones will increase the number of products available
through its website to 90,000 from the current 9,000, giving it
a wider range than sold online by Macy’s Inc. (M), it said in a
presentation.

It had negotiated 15 percent cuts in prices across the full
range of products made by Fossil Inc. and Donna Karan, as well
as larger discounts on some products made by Kiehl’s Inc. and
Yves Saint Laurent, the company said.

Pricing Challenge

By expanding the website, the company plans to grow online
sales to about 10 percent of total revenue from less than 1
percent now. Neiman Marcus Group Inc. and John Lewis Plc both
get more than 16 percent of their sales online, it said.

“Whilst this is an admirable statement and a necessary
repositioning, there is a big challenge to get the right
pricing, range,” Grant Saligari, an analyst at Credit Suisse
Group AG, said in a report today.

Applications for Apple Inc.’s iPhone and iPad and Google
Inc.’s Android devices would be introduced by Christmas this
year, enabling customers to buy directly, David Jones said. The
company will also add six new department stores and an
unspecified number of new smaller-format shops.

Today’s proposal is the first long-term strategy released
by Zahra after a 2008 plan by his predecessor failed to generate
promised total annual profit growth of at least 5 percent
“throughout downturns in the economic cycle.” The 2008
strategy didn’t include an online plan.

Earnings Decline

The company today reported a 20 percent drop in first-half
earnings to A$85 million in the six months ended Jan. 28. Sales
during the period fell 6.7 percent compared with a year earlier.
The full-year forecast implies the weakest annual profit since
2006, when the company earned A$81 million, according to data
compiled by Bloomberg.

Earnings before interest and tax from department stores
dropped 23 percent to A$101.3 million in the first half while
profit from financial services climbed 8 percent to A$24.5
million.

Financial services accounted for 19 percent of operating
income at David Jones last financial year with the company
operating a venture with American Express Co. (AXP)

A 2008 agreement by American Express to underwrite earnings
from the venture ends this year. With the venture shifting to a
profit-sharing model in the 2014 financial year, “the company
expects its share of the Ebit generated by this business to be
broadly half the Ebit contribution in 2013,” David Jones said.